An expected deal to sell off its Intel-based servers to the Chinese electronics company has arrived, reflecting the shifting realities of the market for powerful networked machines.
Giving up a years-long fight for profits in a highly competitive part of the market for powerful networked machines, IBM has agreed to sell its x86 server business to Lenovo for $2.3 billion, the companies announced Thursday.
The x86 server line uses Intel and AMD microprocessors, typically beefed-up cousins to those that run the vast majority of personal computers. IBM in 2005 sold its PC business to Lenovo, too, but it's keeping its other server lines -- its mainframes and those that use its own Power processors.
The sale reflects the changing dynamics of the market for servers, which provide services like hosting Web sites, tracking inventory, and managing banking transactions. In bygone days servers were usually expensive, hulking machines, but over the last two decades, the market has shifted toward relatively small, inexpensive models that are stacked by the dozen into the racks of data centers.
IBM had invested billions of dollars into developing high-end x86 servers with some of the "big iron" power, reliability, flexibility of its higher-end servers, but at the same time, companies like Google charted a new course in which reliability was provided by software that could withstand the failure of a few systems the way an anthill isn't bothered when somebody steps on a couple of ants on the sidewalk. Even worse for traditional server makers, companies like Google and Facebook make their own servers rather than buying them already manufactured.
And at the same time, Amazon Web Services and rival offerings led many customers away from buying their own machines and instead renting services from others better able to build this large-scale server infrastructure.
IBM is the second-place server maker after Hewlett-Packard, as measured by Gartner's estimates of third-quarter revenue, with Dell in third place. IBM's sales accounted for 22.9 percent of a $12.6 billion market, with HP at 27.6 percent and Dell at 16.4 percent. IBM's share had dropped 18.9 percentage points from the year-earlier quarter.
Lenovo, an up-and-comer in the world of Chinese electronics, patted itself on the back for the purchase, which had been rumored for months. Yang Yuanqing, Lenovo's chairman and chief executive, had this statement:
This acquisition demonstrates our willingness to invest in businesses that can help fuel profitable growth and extend our PC Plus strategy. With the right strategy, great execution, continued innovation, and a clear commitment to the x86 industry, we are confident that we can grow this business successfully for the long-term, just as we have done with our worldwide PC business."
The purchase price consists of about $2 billion in cash, with the rest in Lenovo stock. About 7,500 IBM employees are expected to be offered jobs at Lenovo, which will take over existing support contracts as well as future sales.
IBM will continue selling its server software. And as part of the deal, Lenovo plans to become a reseller of IBM storage systems and software.